Target-Date Funds Often Not Used as Intended, Negatively Impacting
Returns

SUNNYVALE, Calif.--(BUSINESS WIRE)--May 13, 2014--
A new study from Financial Engines, America's largest independent
investment advisor1 (NASDAQ: FNGN), and Aon Hewitt, the
global talent, retirement and health solutions business of Aon plc
(NYSE: AON), reveals that 401(k) participants who get professional
investment help in the form of managed accounts, target-date funds or
online advice, earned higher median annual returns than those who go it
alone. However, the study also found that many workers investing in
target-date funds are not using them as intended, ultimately lowering
their investment returns.

The study, Help in Defined Contribution Plans: 2006 through 2012,
examined the 401(k) investing behavior of 723,000 workers at 14 large
U.S. employers. It found that on average, employees using Help had
median annual returns that were 3.32 percent higher, net of fees, than
participants managing their own portfolios. If two participants—one
using Help and one not using Help—both invest $10,000 at age 45,
assuming both participants receive the median returns identified in the
report, the Help participant could have 79 percent more wealth at age 65
($58,700) than the Non-Help participant ($32,800).

“We recognize that many workers benefit from some professional
assistance with their investing,” explained Rob Austin, director of
retirement research at Aon Hewitt. “Help can significantly impact
workers’ long-term savings outlook by giving them the resources they
need to make smarter investment decisions. The key is to use Help in a
way that maximizes results.”

Use of Target-Date Funds

The study found that more than 60 percent of workers who hold money in
target-date funds also invest in other funds. Among partial target-date
fund users, the average allocation to target-date funds was just 35
percent.

“Target-date funds play an essential role in a well-designed 401(k) plan
and can be a cost-effective, all-in-one solution for participants with
simple needs. However, when employees fail to invest in them
exclusively, they often end up undermining the benefits of these funds,
which are controlling risk and providing good diversification,” said
Wei-Yin Hu, vice president of financial research at Financial Engines.
“Improper use occurs for a variety of reasons, including an employer
matching in company stock, workers attempting to time the market, or a
lack of understanding of how target-date funds work. Participants may
also simply be averse to putting all of their money in one fund as their
balance grows.”

Target-date fund misuse is hurting investment returns. The study found
that, on average, workers who were partially allocated to target date
funds had median annual returns that were 2.11 percent lower, net of
fees, than individuals exclusively using target date funds and 2.61
percent lower than those in managed accounts.2

Help Usage Over Time

The Financial Engines/Aon Hewitt study found that automatically
defaulting workers into target-date funds does not necessarily ensure
these funds will be used appropriately. Even when employees start with
their entire retirement portfolio invested in a target-date fund, only
57 percent of them remained fully invested in that fund after five
years. By contrast, 87 percent of participants enrolled in managed
accounts remained in them over the same five-year period.

“Automatically enrolling workers in 401(k) plans has encouraged many who
might not have saved for retirement to begin saving,” said Austin.
“However, many employees are making investment decisions that run
counter to how the plans are intended to work, which can damage their
long-term savings outlook. Companies that have automatic enrollment
should determine if workers are using the plan appropriately, and if
not, make adjustments such as educating participants about proper
diversification.”

Different Types of Help Needed for Different Employees

According to the study, age and plan balance were the strongest
indicators of the type of Help employees would be most likely to use.
Younger workers with lower account balances and lower contribution rates
were more likely to hold target-date funds while younger participants
with larger plan balances tended to prefer online advice. Older
employees with higher average account balances and higher contribution
rates favored managed accounts.

“While everyone’s needs are different, it is clear that most employees
benefit from getting help with their retirement investing,” said
Financial Engines’ Hu. “The key is that you can’t take a
one-size-fits-all approach. Employers can enhance their 401(k) plans by
offering all three forms of Help. Most importantly, companies need to
continue educating employees on how best to save and invest for
retirement.”

The study, Help in Defined Contribution Plans: 2006 through 2012, looked
at actual user behaviors and the financial consequences of their
investment decisions. Conclusions were drawn from seven years of data
from the defined contribution plans of 14 companies representing 723,000
individuals and more than $55 billion in plan assets. Of the 14 defined
contribution plans studied in the report, 12 auto-enroll employees into
target-date funds and 1 auto-enrolls employees into a managed account.

About Aon Hewitt

Aon Hewitt empowers organizations and individuals to secure a better
future through innovative talent, retirement and health solutions. We
advise, design and execute a wide range of solutions that enable clients
to cultivate talent to drive organizational and personal performance and
growth, navigate retirement risk while providing new levels of financial
security, and redefine health solutions for greater choice,
affordability and wellness. Aon Hewitt is the global leader in human
resource solutions, with over 30,000 professionals in 90 countries
service more than 20,000 clients worldwide. For more information on Aon
Hewitt, please visit www.aonhewitt.com.

About Aon

Aon plc (NYSE:AON) is the leading global provider of risk management,
insurance and reinsurance brokerage, and human resources solutions and
outsourcing services. Through its more than 66,000 colleagues worldwide,
Aon unites to empower results for clients in over 120 countries via
innovative and effective risk and people solutions and through
industry-leading global resources and technical expertise. Aon has been
named repeatedly as the world’s best broker, best insurance
intermediary, reinsurance intermediary, captives manager and best
employee benefits consulting firm by multiple industry sources. Visit www.aon.com
for more information on Aon and www.aon.com/manchesterunited
to learn about Aon’s global partnership and shirt sponsorship with
Manchester United.

About Financial Engines: (NASDAQ: FNGN)

Financial Engines, America's largest independent investment advisor3,
is dedicated to making high-quality retirement help available to
everyone — regardless of how much money they have. We’re proudly
independent, which means we don’t sell products or earn commissions
based on our investment recommendations. The companies that choose to
work with us offer our services to their workers as a valuable employee
benefit.

Co-founded in 1996 by Nobel Prize-winning economist Bill Sharpe,
Financial Engines currently offers personalized advice for saving,
investing and living in retirement to millions of workers nationwide.
Our strong ties with employers give us a unique opportunity to form
direct relationships with their employees.

Some people love the challenge of investing. Others prefer to focus
their time elsewhere, but everyone needs to plan for retirement.
Whatever their interest level in investing, Financial Engines combines
cutting-edge technology and a personal, human touch to help all types of
investors reach their retirement goals. For more information, visit www.financialengines.com.

This press release contains forward-looking statements, including
statements regarding the use of professional investment help and
automatic enrollment, which involve risks and uncertainties that could
cause actual results to differ materially. These risks and uncertainties
are outlined in our SEC filings. You are cautioned not to unduly rely on
these forward-looking statements, which speak only as of the date of
this press release. Unless required by law, Financial Engines undertakes
no obligation to publicly revise any forward-looking statement to
reflect circumstances or events after the date of this press release or
to report the occurrence of unanticipated events.